Mortgage Plan 90% Financing

An interview with me on Reshet Bet regarding the 90% mortgage program for first-time homebuyers. My comments are detailed further in this article

Can you smell the scent of elections? It seems the Finance Minister isn’t just sensing it—he’s also anticipating the results. One of the unpleasant outcomes for the Finance Minister is the rise of a new political force—Orly Levy-Abekasis’s party.  Levi-Abekasis has been trying for several years to pass the 90% Mortgage Financing Bill. In my opinion, this is a terrible proposal, and indeed, experts at the Bank of Israel and the Ministry of Finance itself have opposed it for years. But now, ahead of the elections, as the failure of the overarching goal of Kahlon’s appointment as Finance Minister—lowering housing prices—becomes clear, the Finance Ministry is trying to pull a rabbit out of a hat in the form of this very proposal. In this article, I will explain why, in my opinion, a move that supposedly "will make things easier for young people" will actually do the exact opposite.

First of all, a good word

Program "Discount housing" Full In disadvantages For the families who will purchase their apartments through this program. This brief overview cannot cover them all. But for many families, this was the only option for purchasing an apartment because it allowed them to finance it through 90% mortgage financing (for apartments with a market price below 1.8 million shekels). There was no logical reason to discriminate against “Price for the Resident” buyers compared to other buyers. Now, if this proposal is approved, that gap will be closed. Of course, closing it by reducing the financing percentage in the “Price for the Resident” program would have been more economically sound, but we’ll discuss that another time (or in the comments section).

Families' purchasing power won't really improve through the plan.

Straight from the first semester of the Introduction to Economics course: The price depends on demand. If there is a given quantity of a product (a scarce product), then the more people want to buy it, the higher its price rises. This can be demonstrated with two extreme examples:

1. Instead of a 90% mortgage, the Treasury allows you to take out a 110% mortgage (after all, you need to buy furniture too). This isn’t so far-fetched, and banks do offer loans without full collateral. In this case, it’s clear that more apartments will be within reach of a family earning, say, 15,000 shekels. More families will compete for the apartment, and when the landlord has to choose between more families, he can raise the price to filter out all but those earning 50,000 shekels who can afford the high monthly payment required by a 110% mortgage on the apartment. 
2. Instead of the current 75% mortgage, the Ministry of Finance has decided that no mortgages will be granted at all. In other words, if an apartment costs one million shekels, you must come up with one million shekels in cash. In such a case, it is clear that fewer people will be able to purchase the apartment, and the price will likely drop by at least half a million shekels—an amount that people will be able to scrape together here and there. 

This is not just a theory from the economics faculty; it's happening again and again in different places and industries. For example, in 2013, the government decided to strengthen Jerusalem and give a grant of 100,000 shekels to any family that bought their first apartment there. The result was that more people could afford to buy apartments in Jerusalem and the contractors Apartment prices have risen. It's important to understand that this is not a criticism of the contractors. Every business is created to make a profit, and even in the cucumber industry, the price has gone up after hail destroyed many crops and supply decreased.

So what is a ninety percent mortgage financing plan expected to cause? A rise in prices will eventually mean that even those who could supposedly buy their first apartment with just a 10% down payment will no longer be able to do so, because the price of that apartment will rise to such an extent that their 10% down payment will no longer be enough for the apartment they wanted in the first place. Those who could afford to purchase the apartment with 25% in equity at the previous price will buy it at a higher price, as their 25% has eroded to, say, 15%, and their debt burden has increased significantly.

Discrimination against first-time homebuyers will primarily harm them.

Superficially, it seems logical. The state primarily helps those who don't have an apartment at all. These are the youngest and neediest couples, and therefore they should be helped especially. Intentions are one thing, and results are another. One of the most important things for a family is long-term financial planning. With such planning, the family acquires what they need at a given moment and progresses slowly. If, for example, moving apartments costs 50,000 shekels (mover, lawyer, broker, etc.), then it's logical to initially buy a cheaper apartment and then, say, in 6 years when the family grows, move to a larger apartment. This will likely be much cheaper than paying interest and other expenses on an expensive apartment from the start. Moreover, they say, 'Man makes plans, and God laughs." Imagine a childless couple buying a five-room apartment because they are planning for three children. In the next stage, they find themselves in an expensive apartment with a large mortgage, but they need the money precisely for fertility treatments. 

Let’s go back to our family, which has 150,000 shekels. They decide that, at this stage, a three-bedroom apartment costing one million shekels will suffice—meaning a mortgage of 850,000 shekels, or 85% financing. 

Six years later, the family decides to sell the apartment and purchase an apartment worth 1,500,000 shekels with two additional rooms. She sells her apartment and receives 1,000,000 shekels, from which she repays a mortgage of 800,000 shekels (in six years, the mortgage decreased by 50,000 shekels) and now has 200,000 shekels. 

Oops! Six years ago, as a first-time homebuyer, the family could have purchased the five-bedroom apartment for 1,500,000 shekels with a down payment of 150,000 shekels and a mortgage of 90%. Now, with only 200,000 shekels and a mortgage of 70% allowed for a replacement apartment, the family cannot purchase the five-room apartment. 

Absurd. A family that wants to upgrade has more money, but despite that, they can't upgrade their residence and remain stuck in an apartment unsuitable for their needs. Couples should consider this before purchasing their first apartment. They will actually be pushed by the treasury to purchase an apartment that is not suitable for them Only because of the understanding that in the future they will not be able to upgrade to a more suitable apartment. This way, the Treasury causes families to take a big risk right at the start of their lives when they are economically inexperienced. For example, regarding the cost of raising children or at the beginning of their careers. Regarding careers. 

Regulatory Stability - End of Season Sale, Today Only

Until six years ago, it was possible to take out a mortgage with 95% financing. This option has been discontinued. In order to reduce housing prices. The intention to backtrack and reinstate the 90% mortgage financing will lead the public to believe that this decision, too, is temporary and could change again soon. In this situation, families who had no intention of purchasing an apartment will push themselves to make a purchase they did not intend to make, simply out of fear that the benefit will be canceled in the near future and they will lose it. 

Few will risk and many will pay

Banks are experts in risk management. They understand that a mortgage with 90% financing is risky. Just imagine a scenario in which the price of the apartment drops by 10% (after all, that was The Treasure Guarantee (at the beginning of the term), and then the banks have more liabilities than collateral. Until about six years ago, there were 90% financing mortgages, but then the bank required repayment insurance through an external insurance company for these loans. Thus, if the borrower failed to pay the mortgage, the insurance company shared the risk with the bank and paid the mortgage in the borrower’s place. This time as well, the Ministry of Finance understands that the banks will not want to grant risky 90% loans to almost anyone. Reestablishing the EMI company is likely impractical, and the Ministry of Finance does not want to offer a "benefit" that no one will be able to take advantage of, so they came up with an idea. The "government" will provide a guarantee for 90% loans and compensate the banks if such a loan goes unpaid. Why did I put "government" in quotation marks? Because there is no such thing as the government. The government has no money; it has the ability to collect money. Every time you hear that the government intends to pay for something, convert that in your mind toThe taxpayer. So the Ministry of Finance and the Ministry of Economy are pushing the public into deals that are way beyond their capabilities, and in the event the risk materializes and the family cannot pay. The taxpayer will repay the loan in his place. In my opinion, insuring risky loans against the risk of banks, the most powerful entity in the country, is really not the taxpayer's job. 

And what would have been better to do?

It appears that the Ministers of Finance and Economy, both from the Kulanu party, have despaired of lowering housing prices. The attempt to control the housing market by managing it with the "Discount Housing" program is not succeeding because contractors are simply halting construction not covered by the program, supply is decreasing, and there are no solutions for those who don't want to buy lottery tickets. The price of an apartment includes over a third in taxes. The Treasury could decide to reduce taxes on apartments, as Lapid tried to do. The Treasury could encourage contractors to build more apartments, as Sharon, may he rest in peace, did when he was the Minister of Housing and there was a need to absorb a million (!) immigrants from the Soviet Union. And the Treasury could reduce demand, for example, by issuing Apartment price-linked bonds This way, families' money won't be eroded while they wait to purchase an apartment, thereby reducing demand. 

Summary

The 90% mortgage proposal is bad for young couples, bad for banks, and bad for the public as a whole. The only positive aspect of this proposal is that it eliminates the discrimination that previously existed between buyers of “Price for the Resident” homes and buyers of pre-owned or new-construction homes on the open market. The proposal stems solely from political motives, as the Treasury has apparently given up on the possibility of demonstrating success in lowering housing prices before the elections.